RMBS issuers have come to market with a wave of different offerings so far in 2017, including prime, non-prime, non-performing and reperforming loan and credit risk transfer deals. With the new government in the US set on rolling back either part or all of the Dodd-Frank Act, new horizons could open up for mortgage originators.
Newly confirmed US Treasury secretary Steven Mnuchin is reported to be a critic of the landmark financial legislation and President Trump has already signed an executive order aimed at cutting select provisions contained within it. Regardless of how deep the cuts go, the crisis-era regulation looks to be on the chopping block.
With this in mind, and remembering the experience of the housing crisis of 2008, US mortgage lenders must avoid any temptation to cut corners and return to anything resembling the bad old days.
The US RMBS market has been successful in reversing some of the reputational damage that it suffered during the years leading up to the crisis, and the RMBS sector is finally again receiving interest from domestic and international investors hungry for yield and looking for exposure to the US housing recovery.
But if the Trump administration breaks rank with the rest of the world and guts post-crisis regulations, issuers must not take that as an opportunity not to kick-start a race to the bottom, but uphold at least some of the standards that demonstrate they have abandoned the reckless practices that led to the financial crisis.
While they warn that it is early days yet, rating agencies are also beginning to sound the alarm on the implications of Dodd-Frank repeal on the mortgage sector.
“Any significant repeal of the Dodd-Frank Act’s mortgage-related provisions without effective alternatives would weaken residential mortgage backed securities’ credit quality, because these provisions have strengthened the credit quality of mortgage originations, improved servicing practices and bolstered the credit integrity of RMBS structures,” said Moody’s in a credit outlook published this week.
The rating agency pointed to the “Ability to Repay/Qualified Mortgage Rules”, as well as risk retention as key provisions that have strengthened residential mortgage underwriting to the benefit of the RMBS market.
Sources say the reason investors have grown more comfortable with taking on US mortgage risk is that underwriting standards have shown a marked improvement in the years since the crisis.
Far from being a detriment to their businesses, issuers should use tight underwriting standards as a selling point to investors, regardless of whether or not the regulation remains in place. Moreover, undoing all of the work put into complying with the new rules would be money down the drain.
By giving into temptation, US mortgage originators will risk wasting the last eight years of compliance work, as well as losing the trust of RMBS investors globally. They should draw a line in the regulatory sand and vow not to cross it.